COLORADO COMMUNITY COLLEGE SYSTEM. Basic Financial Statements and Compliance Audit. June 30, 2012 and 2011

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1 Basic Financial Statements and Compliance Audit (With Independent Auditors Reports Thereon)

2 LEGISLATIVE AUDIT COMMITTEE 2012 MEMBERS Representative Cindy Acree Chair Representative Angela Williams Vice Chair Senator Lucia Guzman Representative James Kerr Senator Steve King Senator Scott Renfroe Representative Su Ryden Senator Lois Tochtrop Office of the State Auditor Staff: Dianne E. Ray State Auditor Kerri Hunter Deputy State Auditor Lou Skull Legislative Audit Manager KPMG LLP Contract Auditor

3 Limitations on Disclosure of Information Contained in This Document The enclosed report is being distributed to you at this time for your information in accordance with Colorado Revised Statutes (CRS). Section (2) states in part: All reports shall be open to public inspection except for that portion of any report containing recommendations, comments, and any narrative statements, which is released only upon the approval of a majority vote of the committee (emphasis supplied). Section (1) states in part: Any state employee or other individual acting in an oversight role as a member of a committee, board, or commission who willfully and knowingly discloses the contents of any report prepared by, or at the direction of, the Office of the State Auditor prior to the release of such report by a majority vote of the committee as provided in Section (2) is guilty of a misdemeanor and, upon conviction thereof, shall be punished by a fine of not more than five hundred dollars (emphasis supplied). COSA /00

4 Table of Contents Report Summary 1 Recommendation Locator 4 Basic Financial Statements and Compliance Audit Report Section: Description of the Colorado Community College System 5 Findings and Recommendations 7 Disposition of Prior Audit Findings and Recommendations 15 Independent Auditors Report 16 Management s Discussion and Analysis (Unaudited) 18 Business-Type Activity Statements of Net Assets 34 Discretely Presented Component Units Statements of Financial Position 35 Business-Type Activity Statements of Revenues, Expenses, and Changes in Net Assets 36 Discretely Presented Component Units Statements of Activities 37 Business-Type Activity Statements of Cash Flows Notes to Basic Financial Statements 41 Independent Auditors Report on Internal Control over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards 74 Required Communication to Legislative Audit Committee 76 Summary of Unadjusted Audit Differences 79 State-Funded Student Financial Assistance Programs: Introduction (Unaudited) 80 Independent Auditors Report on the Statement of Appropriations, Expenditures, Transfers, and Reversions of the State-Funded Student Financial Assistance Programs 81 Statement of Appropriations, Expenditures, Transfers, and Reversions 83 Notes to Statement of Appropriations, Expenditures, Transfers, and Reversions 84 Schedules of Appropriations, Expenditures, Transfers, and Reversions 85 Audit Comments and Recommendations 98 Page

5 Financial and Compliance Audit Report Summary Year ended June 30, 2012 Purpose and Scope The Office of the State Auditor of the State of Colorado engaged KPMG LLP (KPMG) to conduct a financial and compliance audit of the Colorado Community College System (CCCS or the System) for the year ended June 30, KPMG performed this audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States. We conducted the related fieldwork from April 2012 to November The purpose and scope of our audit was to: Express an opinion on the basic financial statements of CCCS as of and for the year ended June 30, This includes a report on internal control over financial reporting as required by auditing standards generally accepted in the United States of America and Government Auditing Standards. Evaluate compliance with laws, regulations, contracts, and grants governing the expenditure of federal and state funds. Express an opinion on the Statement of Appropriations, Expenditures, Transfers, and Reversions of the State-Funded Student Financial Assistance Programs of CCCS for the year ended June 30, Evaluate progress in implementing prior audit findings and recommendations. CCCS Schedule of Expenditures of Federal Awards and applicable opinions thereon, issued by the Office of the State Auditor, are included in the fiscal year ended June 30, 2012 Statewide Single Audit Report issued under separate cover. Audit Opinions and Reports We expressed unqualified opinions on CCCS basic financial statements and its statement of appropriations, expenditures, transfers, and reversions of the State-Funded Student Financial Assistance Programs as of and for the year ended June 30, Two audit adjustments were not made to the basic financial statements with a net effect of $0 to current year ending net assets. These passed differences are not considered material to CCCS basic financial statements. We issued a report on CCCS compliance and internal control over financial reporting based on an audit of basic financial statements performed in accordance with Government Auditing Standards. Our consideration of the internal control over financial reporting would not necessarily disclose all matters in the internal control that might be deficiencies, significant deficiencies, or material weaknesses. A deficiency in internal control over financial reporting exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A significant deficiency is a deficiency, or combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the entity s financial statements will not be prevented, or detected and corrected, on a timely basis. (Continued)

6 Financial and Compliance Audit Report Summary Year ended June 30, 2012 We identified one deficiency in internal control over financial reporting that we consider to be a significant deficiency. We also noted one deficiency in internal control related to Student Financial Aid Title IV that we consider to be a significant deficiency. We noted no matters involving the internal control over financial reporting and its operation that we consider to be material weaknesses. Summary of Key Findings Colorado Northwestern Community College (CNCC) Our audit identified the following at CNCC: Throughout the year, there was a lack of segregation of duties in CNCC s cashier s offices, at the Rangely and Craig campuses, and common controls, such as the review of daily reconciliations were not occurring. Throughout the fiscal year, the bookstores at both campuses operated in a deficit cash and net asset position. Purchases using direct pay requests were not consistently verified for budget availability prior to being authorized. CNCC does not have adequate financial management processes, including standard reviews of department budgets by the business office. Return of Title IV Funds Colorado Northwestern Community College, Community College of Aurora, Trinidad State Junior College, and Lamar Community College lacked adequate controls to ensure the return of Title IV student financial aid funds was in compliance with federal requirements. Out of 55 return calculations tested for students who withdrew, 13 calculations were identified with at least one exception. Recommendations and CCCS Responses A summary of our recommendations and responses from CCCS can be found in the Recommendation Locator Section of this report. CCCS responses to the findings have not been subjected to the auditing procedures applied in the audit of the basic financial statements, and accordingly, we express no opinion on them. Summary of Progress in Implementing Prior Year Audit Recommendations The audit report for the year ended June 30, 2011 included three recommendations. The disposition of these audit recommendations as of November 9, 2012 was as follows: Implemented $ Partially implemented 3 Total $ 3 2

7 Financial and Compliance Audit Report Summary Year ended June 30, 2012 The 2011 audit report included two recommendations that were reported as not implemented or partially implemented for the year ended June 30, 2010, or for previous years. These recommendations have been implemented as of November 9,

8 Financial and Compliance Audit Recommendation Locator Year ended June 30, 2012 Agency Agency Implementation Rec. no. Page no. Recommendation summary addressed response date 1 11 CNCC should continue to evaluate its policies and procedures and make appropriate CNCC Agree February 2013 changes as necessary to ensure that the college s internal controls are adequate, the college's financial position is properly managed, and that financial information is accurate, complete, and available to decision makers in a timely manner Trinidad State Junior College, Colorado Northwestern Community TSJC, CNCC, Agree February 2013 College, Lamar Community College, and Community College of LCC, and CCA Aurora should work to ensure the timely and accurate Return of Title IV funds. 4

9 Financial and Compliance Audit Description of the Colorado Community College System Year ended June 30, 2012 Organization The State Board for Community Colleges and Occupational Education (SBCCOE or the Board) was established by the Community College and Occupational Education Act of 1967, Title 23, Article 60 of the Colorado Revised Statutes. The Board functions as a separate entity and, as such, may hold money, land, or other property for any educational institution under its jurisdiction. The statute assigns responsibility and authority to the Board for three major functions: The Board is the governing board of the state system of community and technical colleges. The Board administers the occupational education programs of the state at both secondary and postsecondary levels. The Board administers the state s program of appropriations to Local District Colleges (LDCs) and Area Vocational Schools (AVSs). The Board consists of nine members appointed by the governor to four-year staggered terms of service. The statute requires that board members be selected so as to represent certain economic, political, and geographical constituencies. Colorado Community College System s (CCCS ) operations and activities are funded primarily through tuition and fees; federal, state, and local grants; the College Opportunity Fund stipends; a fee-for-service contract with the Department of Higher Education; State Fiscal Stabilization funding (fiscal year 2011 only); and Amendment 50 funding. In addition, the SBCCOE receives and distributes state appropriations for LDCs, AVSs, and school districts offering vocational programs. The 13 colleges in the community college system are as follows: College Arapahoe Community College (ACC) Colorado Northwestern Community College (CNCC) Community College of Aurora (CCA) Community College of Denver (CCD) Front Range Community College (FRCC) Lamar Community College (LCC) Morgan Community College (MCC) Northeastern Junior College (NJC) Otero Junior College (OJC) Pikes Peak Community College (PPCC) Pueblo Community College (PCC) Red Rocks Community College (RRCC) Trinidad State Junior College (TSJC) Main campus location Littleton Rangely Aurora Denver Westminster Lamar Fort Morgan Sterling La Junta Colorado Springs Pueblo Lakewood Trinidad 5 (Continued)

10 Financial and Compliance Audit Description of the Colorado Community College System Year ended June 30, 2012 Enrollment, tuition, and faculty and staff information are presented below. Enrollment information was obtained from the Colorado Commission on Higher Education (CCHE), Final Student Full-Time Equivalent (FTE) Enrollment Report. Staff information was obtained from Format 10 and 40 for the Budget Data Book for fiscal year 2012 that is prepared by higher education institutions for CCHE. CCCS reports FTE student and faculty and staff for three continuous fiscal years as follows: FTE Student Enrollment Resident Nonresident Total Fiscal year: ,796 3,545 62, ,994 3,946 62, ,405 3,647 57,052 FTE Faculty and Staff Faculty Staff Total Fiscal year: ,929 2,193 6, ,903 2,025 5, ,590 1,912 5,502 6

11 Financial and Compliance Audit Findings and Recommendations Year ended June 30, 2012 We have audited the basic financial statements of the Colorado Community College System (CCCS or the System) as of and for the year ended June 30, 2012, and have issued our report thereon, dated November 9, In planning and performing our audit of the basic financial statements, we considered CCCS internal control solely to determine our auditing procedures for the purpose of expressing our opinions on the basic financial statements and not to provide assurance on internal control. In addition, in accordance with Government Auditing Standards, issued by the Comptroller General of the United States, we also have issued our report dated November 9, 2012 on our consideration of CCCS internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grants. We have not considered internal control since the date of this report. We did not audit the financial statements of certain discretely presented component units discussed in note 1 to the basic financial statements, which represent 97.3%, 97.3%, and 92.5% of the 2012 assets, net assets, and revenues of the aggregate discretely presented component units, respectively. Those financial statements were audited by other auditors and were not audited in accordance with Government Auditing Standards. The maintenance of adequate internal control designed to fulfill control objectives is the responsibility of management. Because of inherent limitations in internal control, errors or fraud may nevertheless occur and not be detected. Also, controls found to be functioning at a point in time may later be found deficient because of the performance of those responsible for applying them, and there can be no assurance that controls currently in existence will prove to be adequate in the future as changes take place in the organization. A control deficiency exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or to detect, misstatements on a timely basis. A significant deficiency is a deficiency, or combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the entity s financial statements will not be prevented, or detected and corrected, on a timely basis. Our consideration of internal control was for the limited purpose described in the first paragraph and would not necessarily identify all deficiencies in internal control that might be significant deficiencies or material weaknesses. We did not identify any deficiencies in internal control over financial reporting and its operation that we consider to be material weaknesses. We consider Recommendation Nos. 1 and 2 to be significant deficiencies in internal control. CCCS responses to the findings have not been subjected to the auditing procedures applied in the audit of the basic financial statements, and accordingly, we express no opinion on them. Colorado Northwestern Community College Colorado Northwestern Community College (CNCC) is located in Rangely with a second campus in Craig. Approximately 796 full time equivalent students in northwest Colorado attended CNCC in Fiscal Year This is an enrollment decrease of 12% from Fiscal Year CNCC s net assets at June 30, 2012 totaled $35.5 million or 6% of Colorado Community College System s (CCCS) total net assets. Fiscal Year 2012 operating revenues were $8.5 million or 2% of CCCS operating revenue and operating expenses totaled $14.5 million or 3% of CCCS operating expenses. 7 (Continued)

12 Financial and Compliance Audit Findings and Recommendations Year ended June 30, 2012 What Was the Purpose of the Audit Work? The purpose of the audit work was to evaluate internal and operational controls in place at CNCC and test account balances as of June 30, 2012, as part of the CCCS system-wide audit. In addition, audit testwork was conducted to evaluate the progress CNCC has made in addressing the significant deficiencies that were identified in the Fiscal Year 2011 audit. What Audit Work Was Performed and How Were Results Measured? We performed a site visit at CNCC to evaluate internal controls over revenue, disbursements, payroll and other accounts, and to perform substantive audit procedures in support of the system-wide audit. Our audit work included reviewing CNCC s controls over cash receipts, including those at the bookstores on both campuses, and reperforming daily cash receipt reconciliations on a sample basis. Internal controls over the cashiering operations should include proper segregation of duties, dual custody of cash, reconciliations of cash receipts to the deposit slip and general ledger, and management review. In addition, we reviewed CNCC s controls over disbursements, including direct pay requests. Direct pay requests are used for purchases under $3,000 and are not required to be approved by the purchasing department prior to the purchase of the goods or services. Under this process, departments are allowed to procure these goods and services and submit invoices to accounts payable for payment. As part of this process, departments are required to check the availability of budget prior to making the purchase and attach evidence of budget availability to the invoice. In May 2012, CNCC lowered the threshold for use of direct pay requests from $3,000 to $1,000. Finally, we considered CNCC s financial management and budget processes. Over the past several years, CNCC has been in a deficit cash position, which continued through most of Fiscal Year As of June 30, 2012, CNCC had a positive cash position of about $2,099,200. However, this was largely due to a one-time transfer of about $2 million to CNCC at year end. This inflow was from a release of funds related to the completion of a building on the Craig campus during the year. The funds were transferred from an account at the state Treasurer where the funds were held during the construction process. What Problem Did the Audit Work Identify? In the Fiscal Year 2011 audit, we identified three deficiencies in internal control at CNCC that we considered to be significant deficiencies. The three deficient areas resulted in recommendations related to controls over cashiering, bookstore operations at both campuses, and the institution s general accounting and financial reporting. During our Fiscal Year 2012 audit, we determined that CNCC made progress in implementing the recommendations from the previous audit; however, certain aspects of CNCC s corrective action plans in these three areas have not been fully implemented. Specifically, during Fiscal Year 2012 CNCC drafted policies and procedures over key business processes. However, during Fiscal Year 2012, the policies and procedures were not fully implemented. In addition, we noted that CNCC needs to continue to address its financial management processes, including cash forecasting and budget management. Our specific findings are identified by area below. 8 (Continued)

13 Financial and Compliance Audit Findings and Recommendations Year ended June 30, 2012 Cashiering Controls CNCC has a cashiering office at each of the Rangely and Craig campuses. The Cashier collects student payments for tuition, student fees, and other auxiliary activities. The Craig campus cashier is supervised by the Bursar located at the Rangely campus (who is also the cashier at the Rangely campus). The Bursar is supervised by the Business Officer. In Fiscal Year 2012, CNCC collected $6,106,215 in cash receipts from operating activities through the cashier s office. In the prior year, we identified a lack of segregation of duties in the cashier s offices at each campus as well as lack of basic controls, such as the performance and review of daily reconciliations of cash receipts and the sweep account, and monthly reconciliations of the general ledger to the Colorado Financial Reporting System (COFRS). Finally, we noted CNCC lacked written policies and procedures for the cashiering operations and had not yet implemented outstanding recommendations from a CCCS Fiscal Year 2010 Internal Audit report. In Fiscal Year 2012, CNCC drafted policies and procedures for the cashier operations and continued to implement recommendations from the 2010 Internal Audit report. These policies and procedures were designed to implement the corrective action plans developed to address the findings and recommendations contained in the CCCS Fiscal Year 2010 Internal Audit report. CNCC implemented daily and monthly reconciliations for cash receipts, the sweep account, and the general ledger to COFRS. The monthly reconciliations are prepared by the Controller and reviewed by the V.P. of Business and Finance. We found, however, that the daily reconciliations of cash receipts at the Rangely campus that we tested did not show evidence of review by someone other than the preparer. Specifically, KPMG selected a sample of ten daily cash reconciliations and found that none had evidence of review by someone other than the preparer. We also noted that there continued to be a lack of segregation of duties in certain parts of CNCC s cash receipts process through June 30, Specifically, at the Rangely campus, during Fiscal Year 2012 one individual, the Rangely campus Bursar, was responsible for both receiving cash and performing reconciliations of cash receipts, and had the ability to make adjustments to student accounts. As of June 30, 2012, a search for a cashier on the Rangely campus had been started and the position was filled as of August 1, 2012 to directly address the previous lack of segregation of duties controls. Bookstore Controls CNCC operates two bookstores, one each at the Rangely and Craig campuses. Each bookstore has one manager, who is supervised by the Bursar of the Rangely campus. Staffs at the bookstores receive inventory, collect cash for sales, and track inventory in the Point-of-Sale (POS) system. The POS system is used by the bookstore staff to track purchases and sales of books. The bookstores at the Rangely and Craig campuses had $328,000 and $120,000 of sales during Fiscal Year 2012, respectively. In the prior year, we found that bookstore staff had not conducted physical inventories at fiscal year end, had not developed written policies and procedures for bookstore operations, had not implemented all the recommendations of the 2010 Internal Audit report, and lacked segregation of duties and controls over inventory and cash receipts for the two bookstores. In addition, we identified that both the Craig and Rangely bookstores were in negative cash positions and the Craig bookstore was in a deficit net asset position at fiscal year end. In Fiscal Year 2012, CNCC conducted a physical inventory of the bookstores at fiscal year-end, developed written 9 (Continued)

14 Financial and Compliance Audit Findings and Recommendations Year ended June 30, 2012 policies and procedures, began to implement the remaining outstanding recommendations of the 2010 Internal Audit report, put in place proper segregation of duties over cash receipts, and implemented use of the POS system. In addition, the campuses implemented reconciliations of the POS system to cash receipts and the general ledger. To address the deficit cash and net asset positions of both bookstores, CNCC transferred cash from other auxiliary activities of $179,043 to the Rangely bookstore and $191,496 to the Craig bookstore. As a result, the cash balances were zero at both bookstores as of June 30, 2012, and both reported positive net assets as a result of the transfer. This transfer allowed the bookstores to begin the new fiscal year without negative cash and net asset positions. However, CNCC must continue to evaluate and improve the historically negative performance of its bookstores. Cash Disbursements During the year, the department reported that when they used the direct pay requests, they did not attach to the invoice evidence that there was available budget to cover the expenditure, as required by college procedures. As a result, there was an increased risk of overspending. Towards the end of Fiscal Year 2012, CNCC implemented a process in which the Controller began approving all direct pay requests and checking the expenditure against the budget. Financial Management CNCC does not have adequate financial management processes, including standard reviews of department budgets by the business office. The business officer and controller are working to put in place regular reviews of department budgets; however, those reviews were not consistently performed during Fiscal Year Also, CNCC has not performed a forecast of cash flows in the past three years. By implementing a monthly cash flow forecast, the college can help ensure its cash position is actively addressed in the future. Why Did the Problem Occur? The control environment has not been designed to ensure adequate supervision and review of the cashiering operations, nor has an appropriate segregation of duties for cashiering operations been implemented. CNCC has not consistently required departments to demonstrate availability of budget before a disbursement is made on a direct pay request. Additionally, CNCC has not implemented adequate budgeting controls or processes, nor does it require staff to perform routine cash flow analyses and projections throughout the fiscal year. This is a result of a lack of knowledge by management of the system and the lack of ability to use reports to analyze operating results. Why Does This Problem Matter? Lack of adequate financial management controls increases the risk of misappropriation of assets, unnecessary costs, budget overruns and financial errors. Errors in financial information result in management and users of the financial statements not having accurate information on which to base decisions. (Classification of Finding: Significant Deficiency) 10 (Continued)

15 Financial and Compliance Audit Findings and Recommendations Year ended June 30, 2012 Recommendation No. 1 CNCC should continue to evaluate its policies and procedures and make appropriate changes as necessary to ensure that the college s internal controls are adequate, the college s financial position is properly managed, and that financial information is accurate, complete, and available to decision makers in a timely manner. Specifically, CNCC should: a. Complete the implementation of the corrective action plan for cash receipts, including implementing segregation of duties with the Bursar on the Rangely campus. b. Ensure evidence of internal control, such as review and approval of daily reconciliations, is documented. c. Continue to monitor the financial position of the bookstores on a monthly basis and develop a long-term plan to improve the financial condition of the bookstores. d. Evaluate the direct pay request process and implement policies and procedures to ensure proper review of expenditures, including availability of budget, prior to making expenditures. e. Implement effective financial management processes, including adequate review of department budgets and forecasting of cash flows, at least on a monthly basis. This includes providing training to management regarding the CNCC system, including topics such as accounting and budgeting policies and procedures, and the performance of proper forecasting using the available resources. CCCS Response a. Agree. Implementation date: August Rangely Campus Cashier position was filled in August The Bursar no longer has access to the safe or has any cash handling responsibility. b. Agree. Implementation date: July Cashiers have their daily deposit verified by the Bookstore Clerk or the VP s administrative assistant on the Craig Campus and the Bursar or the Accounting Coordinator on the Rangely Campus and paperwork is reviewed and signed by verifier. c. Agree. Implementation date: February Controller continues to monitor the financial position on a monthly basis. The bookstores provide Cost of Goods Sold and Inventory reports at each month end. The Controller reconciles these reports with Banner, and analyzes the financial position. Quarterly, the Controller distributes bookstore financial statements for each bookstore. Performance analysis of the bookstores is ongoing and policies are being reviewed for sustainability. Development of a comprehensive business plan for each bookstore has been initiated to meet the target completion date of February, d. Agree. Implementation date: August The Direct Pay request process has been revamped in its entirety. All Direct Pay requests are submitted to Purchasing, which verifies budget prior to obtaining approval. All payment requests are being reviewed by the Controller to ensure that the purchase is appropriate according to fiscal rules and internal policy. e. Agree. Implementation date: December Evaluation of department budgets has been occurring on a weekly basis by the Business Officer since July As discrepancies are identified immediate attention is given to those discrepancies until adequately resolved. The Business Officer is obtaining training on forecasting cash flow, after which, the Business Officer will, at a minimum, provide the President s Cabinet a monthly cash forecast. 11 (Continued)

16 Financial and Compliance Audit Findings and Recommendations Year ended June 30, 2012 Controls over the Return of Title IV Funds Trinidad State Junior College (TSJC), Colorado Northwestern Community College (CNCC), Lamar Community College (LCC), and Community College of Aurora (CCA) participate in several federal student financial aid programs, including Direct Loans, Pell, and Federal Work Study, and other programs. Title IV establishes general rules that apply to student financial aid programs and requires that when a student who has received Title IV funds withdraws from an institution, the institution must determine the amount of Title IV aid that shall be returned to the federal government for Title IV programs. TSJC distributed $7,378,319, CNCC distributed $3,470,391, LCC distributed $3,535,830, and CCA distributed $30,508,717, in Title IV funds to students as of June 30, 2012 in fiscal year What was the purpose of the audit work? The purpose of the audit work was to assess the adequacy of the colleges controls and compliance over the return of Title IV funds to the US Department of Education when students who receive these funds withdraw from the institution. What audit work was performed and how were results measured? The audit work included reviewing a sample of 55 return calculations for Title IV students who withdrew across the four colleges during fiscal year 2012 to determine whether adequate controls were implemented by the colleges to ensure Title IV funds were returned in compliance with federal regulations. When a recipient of Title IV grants or loan assistance withdraws from an institution during a payment period (the current semester for which the student has paid) or period of enrollment (if the student is enrolled in a non-standard term) in which the recipient was in attendance, the institution must determine the amount of Title IV aid earned by the student as of the student s date of withdrawal. If the total amount of Title IV assistance earned by the student is less than the amount that was disbursed to the student as of the date of the student s withdrawal determined by the institution, the excess disbursed must be returned to the Title IV programs. Federal regulations require that institutions return Title IV funds to the US Department of Education no later than 45 days after the date of the student s withdrawal as determined by the institution. What problem did the work identify? Overall, out of 55 return calculations we tested for students who withdrew, 13 calculations were identified with at least one exception. We noted the following exceptions as a result of our work. At TSJC, out of 14 calculations tested, a total of 8 calculations had one or more exceptions. In five calculations, the required process for determining the withdrawal date and the required documentation for calculation of the amount of funds that should be returned was not completed by TSJC within the required 45 days of withdrawal notification. In two of these five calculations, students had received excess Title IV funds that were returned. In four calculations, TSJC used incorrect information when calculating the amount of funds to be returned. In two of these four calculations, the tuition rate used was too high, which resulted in the return of a total of $370 more of Title IV funds than should have been, had the correct amounts been used. In the other two calculations the use of incorrect information did not result in an improper amount of funds returned. 12 (Continued)

17 Financial and Compliance Audit Findings and Recommendations Year ended June 30, 2012 At CNCC, out of 13 calculations tested we identified one for which the incorrect withdrawal date was used in the calculation. This did not affect the amount of funds returned. At LCC, out of 13 calculations tested, we identified one for which the process for determining the withdrawal date and the required documentation for the calculation of the amount of funds that should be returned was not completed within the required 45 days of withdrawal notification. This did not affect the amount of funds returned as the student did not receive excess funds. At CCA, out of 15 calculations tested we identified three for which the process for determining the withdrawal date and the required documentation for the calculation of the amount of funds that should be returned was not completed within the required 45 days of withdrawal notification. This did not affect the amount of funds returned as the student did not receive excess funds. Why does this problem matter? Failure to properly calculate or initiate refunds in the timeline required increases the risk that Title IV funds are not returned in accordance with federal regulations. Why did the problem occur? In general, the institutions did not have an adequate process for timely identification of withdrawing students by the institution s respective directors of financial aid, who initiate the process for calculating whether Title IV funds must be repaid to the US Department of Education. Additionally, the institutions did not have an adequate supervisory review process in place over of the return of Title IV funds calculations to ensure calculations were accurate. (Classification of Finding: Significant Deficiency) (CFDA No ; ; Student Financial Aid Cluster, Special Tests and Provisions) Total Known Questioned Costs: $0 as there no instances in which the schools returned less Title IV funds than were required. In the event that the school returned more funds that were required, the school will work with US Department of Education to resolve the excess amount. Recommendation No. 2 Trinidad State Junior College, Colorado Northwestern Community College, Lamar Community College, and Community College of Aurora should implement controls to ensure that Title IV funds are returned to the federal government in the required timeframe and that the return of Title IV calculations are properly reviewed to ensure accuracy. 13 (Continued)

18 Financial and Compliance Audit Findings and Recommendations Year ended June 30, 2012 CCCS Response Agree. The report available to identify Title IV recipients who have withdrawn has been available to colleges but was not consistently run in a timely manner by all institutions. To ensure timely processing in the future, the Financial Aid Directors at CNCC, LCC, TSJC, and CCA will revise their procedures by November 2012 to run the process at least weekly. This will identify students within seven days of a withdrawal. Schools will then process the Return of Title IV (R2T4) Worksheet within three weeks of identifying withdrawn students. Output from this Banner process will be kept on a secure network drive for future reference and documentation. In addition, a reporting tool will be created for all schools which will alert Financial Aid Directors of any withdrawn students who may not have a completed Return of Title IV worksheets within 30 days of a student being identified as withdrawn. This tool will be available for schools by February To ensure accuracy with the calculation, the Director of Financial Aid at CNCC, LCC, TSJC, and CCA will designate a secondary reviewer who will verify the calculated values in at least 10% of the total processed worksheet. This will be carried out by the Financial Aid Advisors at the Processing Center for CNCC and LCC, the administrative assistant at TSJC, and the Financial Aid Counselors at CCA. This secondary review will be documented in the student s file. This process will be implemented by February

19 Financial and Compliance Audit Disposition of Prior Audit Findings and Recommendations Year ended June 30, 2012 Following are the audit recommendations made for the year ended June 30, 2011 and their disposition as of November 9, 2012: Recommendation Disposition Recommendation No. 1 CNCC should strengthen controls in the cashier s offices by developing written procedures for cashiering operations including the cash receipt process and defining roles and responsibilities of the personnel involved in the process, ensuring daily cash reconciliations, including reconciliation to the deposit slip, are performed timely and reviewed by the Bursar or Controller, as applicable for each campus, ensuring the cash sweep account is reconciled to the general ledger and the reconciliation is reviewed on a monthly basis, and ensuring the monthly COFRS reconciliations are prepared and reviewed. Partially implemented. See current year recommendation no. 1. Recommendation No. 2 CNCC should strengthen controls in the bookstores by conducting a physical inventory at fiscal year-end, implementing the use of the POS system for inventory management, performing a reconciliation of the POS system to cash receipts deposit and the general ledger, ensuring dual custody over cash, and implementing proper segregation of duties between purchasing, receiving, sales, and physical inventory. Partially implemented. See current year recommendation no. 1. Recommendation No. 3 CNCC should evaluate its accounting and financial reporting policies and procedures and make appropriate changes as necessary to ensure the college s financial information is accurate, complete, and available to decision makers in a timely manner. Partially implemented. See current year recommendation no

20 KPMG LLP Suite th Street Denver, CO Independent Auditors Report The Members of the Legislative Audit Committee Colorado Community College System: We have audited the accompanying financial statements of the business-type activities and the aggregate discretely presented component units of the Colorado Community College System (CCCS), a component unit of the State of Colorado, as of and for the years ended, which collectively comprise CCCS basic financial statements as listed in the table of contents. These financial statements are the responsibility of CCCS management. Our responsibility is to express opinions on these financial statements based on our audits. We did not audit the financial statements of certain discretely presented component units, which represent 97.3%, 97.3%, and 92.5% and 99.0%, 99.0%, and 99.0% of the 2012 and 2011 assets, net assets, and revenues of the aggregate discretely presented component units, respectively. Those financial statements were audited by other auditors whose reports thereon have been furnished to us, and our opinions, insofar as they related to the amounts included for the discretely presented component units, are based on the reports of other auditors. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The financial statements of the aggregate discretely presented component units were not audited in accordance with Government Auditing Standards. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of CCCS internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of other auditors provide a reasonable basis for our opinions. In our opinion, based on our audits and the reports of other auditors, the financial statements referred to above present fairly, in all material respects, the respective financial position of the business-type activities and the aggregate discretely presented component units of Colorado Community College System as of, and the respective changes in financial position and, where applicable, cash flows thereof for the years then ended, in conformity with U.S. generally accepted accounting principles. In accordance with Government Auditing Standards, we have also issued our report dated November 9, 2012 on our consideration of CCCS internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit. 16 KPMG LLP is a Delaware limited liability partnership, the U.S. member firm of KPMG International Cooperative ( KPMG International ), a Swiss entity.

21 U.S. generally accepted accounting principles require that the management s discussion and analysis on pages 18 to 33 be presented to supplement the basic financial statements. Such information, although not a required part of the basic financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. November 9,

22 Management s Discussion and Analysis (Unaudited) The following discussion and analysis provides management s view of the financial position and results of operations for the Colorado Community College System (CCCS or the System) as of (fiscal years 2012 and 2011, respectively), with comparative information presented for fiscal year This analysis should be read in conjunction with CCCS financial statements and notes to the basic financial statements. This analysis is intended to make CCCS financial statements easier to understand and communicate our financial situation in an open and accountable manner. The CCCS includes 13 public community colleges throughout the state, the system office, and an employee benefit trust, presented as a blended component unit. In addition, CCCS has 14 supporting foundations, which are not included in CCCS primary financial reporting entity, but are included as discretely presented component units in CCCS basic financial statements (note 1). The Community College of Denver Foundation entered into dissolution effective February 2010 and all assets were remitted to the Community College of Denver (CCD). The CCD Foundation was reestablished effective November 10, CCCS is Colorado s largest institution of higher education and served 146,000 students (62,000 full-time equivalent students), approximately, during the fiscal year ended June 30, The System has 8,600 employees, approximately, of which two-thirds are faculty and adjunct instructors. The colleges offer a wide variety of both academic and career programs leading either to degrees and certificates, or otherwise enhancing personal and professional growth. In addition to the 13 community colleges, CCCS also assists the State Board for Community Colleges and Occupational Education (the Board) in exercising certain curriculum and funding authority over three Area Vocational Schools (AVSs), two Local District Colleges (LDCs), and secondary career and technical programs in over 160 school districts throughout the state. Higher education institutions in the State of Colorado (the State) have the ability to designate themselves as enterprises under the State s Constitution Article X, Section 20, commonly referred to as the Taxpayer s Bill of Rights (TABOR), given the institution meets the stated qualifications. CCCS qualified as an enterprise for fiscal year 2012 because it is a government-owned business with legal authority to issue revenue bonds. In addition, the System was required to receive (and is expected to continue to receive) less than 10.0% (in relation to total revenues) in support from the State. In fiscal years 2012, 2011, and 2010, the System received 1.7%, 1.4%, and 2.0%, respectively, in State support (notes 4 and 20). Beginning in fiscal year 2008, House Bill specifically excluded moneys transferred from the Colorado Department of Education (CDE) for career and technical education as state grants for the purpose of this calculation, including funding under the Career and Technical Act (CTA). CCCS is partially funded through the College Opportunity Fund (COF) stipend program and a fee-for-service (FFS) contract with the Colorado Department of Higher Education (CDHE), approved by the Colorado Commission on Higher Education (CCHE). COF provides state tax dollars to students through a stipend paid on a per credit-hour basis to the institution at which the student is enrolled. COF may support the costs of up to 145 eligible undergraduate credits for each eligible student. For fiscal years 2012, 2011, and 2010, respectively, the COF stipend was $62, $62, and $44, per credit hour, which students could use to pay for a portion of their tuition. The FFS contract is the purchase of educational services, by the State, from CCCS that are not part of the COF stipend program. In fiscal years 2012, 2011, and 2010, respectively, CDHE s contract with CCCS purchased credit hours for vestibule labs, reciprocal programs, and educational services in rural areas. In fiscal years 2011 and 2010, the CDHE s contract with CCCS also included purchased credit hours for career and technology, vocational, and other high cost, specialized instructional educational services (notes 3 and 4). 18 (Continued)

23 Management s Discussion and Analysis (Unaudited) Student tuition and fees, net of scholarship allowance comprise several important and offsetting components. Student tuition and fees charges alone include all amounts earned for the provision of instructional services to students, including stipends paid for eligible undergraduate students under COF. In fiscal year 2012, CCCS had a $16.8 million increase in gross tuition and fee revenue resulting from a 1.0% decrease in enrollment, offset by a 10% and 5.0% increase in resident tuition and nonresident tuition rates, respectively. This includes a decrease in COF funding of approximately $2.6 million compared to fiscal year This increase was offset by an increase in the scholarship allowance, or the amount of federal- and state-funded financial assistance paid on behalf of students, which is netted against tuition and fee revenue. This scholarship allowance offset increased $7.2 million in fiscal year 2012 due in part to the increase in Federal Pell awards received for students, on a per student basis, as well as an increase in the number of students receiving Pell awards. The following table represents the change in tuition and fees from fiscal year 2011 to 2012 (in millions). Tuition and fees increase due to enrollment changes and rate increases $ 16.8 Less decrease in COF stipend funding (2.6) Gross tuition and fee increase 14.2 Reduced by increased scholarship allowance offset (7.2) Net increase in student tuition and fees, net of scholarship allowance $ 7.0 The following table represents the change in tuition and fees from fiscal year 2010 to 2011 (in millions). Tuition and fees increase due to enrollment and rate increases $ 42.5 Plus increase in COF stipend funding 35.5 Gross tuition and fee increase 78.0 Reduced by increased scholarship allowance offset (33.6) Net increase in student tuition and fees, net of scholarship allowance $ 44.4 On February 19, 2009, the American Recovery and Reinvestment Act (ARRA) of 2009 was signed into law, including billions of federal funds allocated to state governments. Portions of these federal funds were distributed through the CDHE as the fiscal agent under an award made from the Colorado Governor s Office to the institutions of higher education in the State via the State Fiscal Stabilization Fund (SFSF) Program. This education grant funding was used for activities allowable under the U.S. Department of Education s guidance to mitigate the impacts of state cuts during the recession. During fiscal year 2011, the State distributed $4.5 million in funds to CCCS as an offset to funding cuts in COF in the form of reduced student stipends and reduced FFS contracts. In fiscal year 2012, no SFSF funds were distributed. In accepting these funds, certain stipulations were placed on the use of the funds, including steps to mitigate tuition and fee increases for in-state students. SFSF funding is provided as pass-through funds through the State without the federal government or State directly receiving goods and services and is recorded as nonoperating revenue. 19 (Continued)

24 Management s Discussion and Analysis (Unaudited) In November 2008, voters passed Amendment 50, which expanded limited stakes gaming in three Colorado mountain towns. CCCS received approximately $6.0 million in Amendment 50 funding in fiscal year 2012, of which $5.4 million was used for classroom instruction-related expenses and $0.6 million was awarded to students for scholarships. In fiscal year 2011, CCCS received approximately $5.4 million, of which $4.5 million was used for classroom instruction-related expenses and $0.6 million was awarded to students for scholarships. On October 13, 2010, CCCS issued series 2010C Systemwide Revenue Bonds for $6,545,000 and Series 2010D Systemwide Revenue Bonds for $31,455,000 for CCD and Pueblo Community College (PCC). The bond projects funded include CCD s construction and equipping of the Student Learning and Success Building along with PCC s Student Center and the Learning Resource Center. On January 25, 2012, CCCS issued series 2012A Systemwide Revenue Refunding Bonds for $11,495,000. The Bonds were used to current and advance refund the capital leases between the Colorado Community College Foundation and the System Office, Pikes Peak Community College (PPCC), and Arapahoe Community College (ACC). Financial Highlights At June 30, 2012, CCCS assets of $813,544,882 exceeded its liabilities of $190,258,962 by $623,285,920. At June 30, 2011, CCCS assets of $780,838,428 exceeded its liabilities of $193,842,281 by $586,996,147. The resulting net assets are summarized into the following categories: June Invested in capital assets, net of related debt $ 323,746, ,486, ,351,174 Restricted, expendable 37,800,466 36,031,366 29,159,795 Unrestricted 261,738, ,477, ,040,177 Total net assets $ 623,285, ,996, ,551,146 The restricted, expendable net assets may be spent, but only for the purposes for which the donor or grantor or other external party intended. Unrestricted net assets are not externally restricted; however, they are often internally designated by the college s administration or Board for a number of purposes including capital maintenance and building and equipment expansion and repair, and new programs. During fiscal year 2012, the CCCS total net assets increased by $36,289,773. The increase in net assets is a result of excess revenue streams compared to overall expenses. During fiscal year 2011, the CCCS total net assets increased by $85,445,001. The increase in net assets is a result of increased tuition and fees revenue, increase in COF and an offsetting increase in scholarship allowances, an increase in auxiliary revenue, an increase in FFS, an increase in Federal Pell grants, and an increase in State Capital Contributions, offset, in part, by an increase in operating expenses. 20 (Continued)

25 Management s Discussion and Analysis (Unaudited) Overview of the Financial Statements The financial statements are designed to provide readers with a broad overview of the System s finances and comprise three basic statements. The Independent Auditors Report presents an unqualified opinion prepared by our auditors (an independent certified public accounting firm, KPMG LLP) on the fairness, in all material respects, of our financial statements. The Statement of Net Assets presents information on all of CCCS assets and liabilities at a point in time (), with the difference between the two reported as net assets. Over time, increases or decreases in net assets may serve as a useful indicator of whether the financial position of the System is improving or deteriorating. A reader of the financial statements should be able to determine the assets available to continue CCCS operations, how much CCCS owes to vendors and lending institutions, and a picture of net assets and their relative availability for expenditure by CCCS. The Statement of Revenues, Expenses, and Changes in Net Assets presents information showing how CCCS net assets changed during the fiscal period (the fiscal years ended ). All changes in net assets are reported as soon as the underlying event giving rise to the change occurs, regardless of the timing of related cash flows. Thus, revenues and expenses are reported in this statement for some items that will only result in cash flows in future fiscal periods (e.g., the payment for accrued compensated absences, or the receipt of amounts due from students and others for services rendered). Its purpose is to assess CCCS operating results. CCCS reports its activity as a special-purpose government engaged only in business-type activities using the economic resources measurement focus and the accrual basis of accounting. The Statement of Cash Flows presents cash receipts and payments to and from CCCS for the reporting period (the fiscal years ended ) using the direct method. The direct method of cash flow reporting portrays cash flows from operations, noncapital financing, capital and related financing, and investing activities. Its purpose is to assess CCCS ability to generate net cash flows and meet its obligations as they come due. The Notes to Basic Financial Statements provide additional information that is essential to a full understanding of the data provided in the basic financial statements. Information is provided regarding both the accounting policies and procedures CCCS has adopted as well as additional detail for certain amounts contained in the basic financial statements. The notes follow the basic financial statements. Financial Analysis The Statement of Net Assets presents information on all of CCCS assets and liabilities, with the difference between the two reported as net assets. The assets reported by CCCS exceeded liabilities at, resulting in net assets of $623,285,920 and $586,996,147, respectively. The majority (51.9% for 2012 and 53.4% for 2011) of CCCS net assets are invested in capital assets (e.g., land, buildings, and equipment), net of related debt. These assets are used to provide services to students, faculty, and administration. Consequently, these assets are not available to fund future spending. 21 (Continued)

26 Management s Discussion and Analysis (Unaudited) The assets reported by CCCS exceeded liabilities at June 30, 2011 and 2010, resulting in net assets of $586,996,147 and $501,551,146, respectively. The majority (53.4% for 2011 and 57.1% for 2010) of CCCS net assets are invested in capital assets (e.g., land, buildings, and equipment), net of related debt. June Current assets $ 403,736, ,427, ,671,460 Noncurrent assets, including capital assets of $383,429,906, $352,744,435, and $321,758,543, respectively 409,808, ,410, ,424,208 Total assets 813,544, ,838, ,095,668 Current liabilities 93,200,789 93,868,180 88,047,489 Noncurrent liabilities 97,058,173 99,974,101 57,497,033 Total liabilities 190,258, ,842, ,544,522 Net assets: Invested in capital assets, net of related debt 323,746, ,486, ,351,174 Restricted expendable 37,800,466 36,031,366 29,159,795 Unrestricted 261,738, ,477, ,040,177 Total net assets $ 623,285, ,996, ,551,146 Current assets increased as of June 30, 2012 compared with June 30, 2011 by approximately $21.3 million or 5.6% as a result of a $20.9 million increase in cash and cash equivalents and a $1.4 million increase in accounts receivable, offset by a $1.0 million decrease in inventories. Increases in accounts receivable include an increase of $1.4 million in other receivables, net, and an increase of $300 thousand in student receivables, net, offset by a decrease of $300 thousand in due from other governments, net, approximately. Current assets increased as of June 30, 2011 compared with June 30, 2010 by approximately $70.8 million or 22.7% as a result of an $81.6 million increase in cash and cash equivalents and an $11.6 million decrease in accounts receivable. Decreases in accounts receivable include a decrease of $5.9 million in due from other governments and a decrease of $6.3 million in other receivables offset by an increase of $500 thousand in student receivables, approximately. Current liabilities decreased as of June 30, 2012 compared with June 30, 2011 by approximately $700 thousand or 0.7% due to a decrease of $300 thousand capital leases payable, current portion, and a decrease of approximately $3.5 million in deferred revenue primarily related to the summer tuition decrease from reduced enrollment, offset by an increase in accounts payable and accrued liabilities of $1.3 million due to normal timing differences, an increase of $1.4 million of bonds payable, current portion, and an increase of $400 thousand in deposits held for others. 22 (Continued)

27 Management s Discussion and Analysis (Unaudited) Current liabilities increased as of June 30, 2011 compared with June 30, 2010 by approximately $5.8 million or 6.6% due to normal timing differences in the payment of accounts payable and accrued liabilities of $5.2 million outstanding at year-end, an increase of approximately $1.3 million in deferred revenue primarily related to the summer tuition increase from enrollment, offset by a decrease of $500 thousand in deposits held for others and $300 thousand in other long-term liabilities, current portion. Net assets may have restrictions imposed by external parties, such as donors, who specify how the assets must be used, or by their nature are invested in capital assets (property, plant, and equipment). Restricted net assets (6.1% for 2012, 6.1% for 2011, and 5.8% for 2010 of total net assets) are primarily restricted for auxiliary programs, scholarships, loans, and community training programs. Unrestricted net assets (42.0% for 2012, 40.5% for 2011, and 37.1% for 2010 of total net assets) are available for general operations at the discretion of the Board. However, the Board has placed some limitations on future use by designating unrestricted net assets for certain purposes, including capital maintenance, equipment expansion and repair, and new programs. The Statement of Revenues, Expenses, and Changes in Net Assets reports the results of operating and nonoperating revenues and expenses during the year and the resulting increase or decrease in net assets at the end of the year. A key component of this statement is the differentiation between operating and nonoperating activities. Operating revenues are received for providing goods and services to the various constituencies of CCCS. The COF stipend program revenue is included in student tuition and fees and FFS contract revenue is separately presented, both of which are classified as operating revenues. Operating expenses are paid to acquire or produce goods and services provided in return for operating revenue and to carry out the mission of CCCS. Nonoperating revenues are those where goods or services are not provided. Thus, state appropriations are nonoperating because they are provided by the State without the State directly receiving goods and services. During 2011, SFSF funding is provided as pass-through funds through the State without the federal government or State directly receiving goods and services and is also considered nonoperating. For similar reasons, Amendment 50 funding and most gifts and investment income are also nonoperating revenue. State appropriations, net of distributions to LDCs and AVSs, represent approximately 4.6%, 4.5%, and 4.8%; student tuition and fees represent approximately 41.0%, 37.7%, and 32.8%, and FFS contracts represent approximately 1.9%, 3.8%, and 0.6% of CCCS total revenue (less distributions to LDC and AVS) from all sources in fiscal years 2012, 2011, and 2010, respectively, as detailed in the charts on the following pages. However, like most public institutions of higher education, public support in the form of state appropriations offsets or supplements the operating loss from the cost of operations. CCCS experienced a $154.8 million loss from operations in fiscal year 2012 compared to a $130.0 million loss from operations in fiscal year 2011 and a $169.6 million loss from operations in fiscal year In fiscal year 2012, this operating loss was offset by net state appropriations of $26.4 million, Federal Pell grants of $145.2 million, and Amendment 50 funding of $6.0 million. In fiscal year 2011, this operating loss was offset by net state appropriations of $26.9 million, SFSF of $4.5 million, Federal Pell grants of $144.5 million, and Amendment 50 funding of $5.4 million. In fiscal year 2010, this operating loss was offset by net state appropriations of $26.8 million, SFSF of $71.2 million, and Federal Pell grants of $108.1 million. 23 (Continued)

28 Management s Discussion and Analysis (Unaudited) The overall increase in the operating loss over the three-year period presented is a result of an increase in operating expenses in excess of operating revenues due to services provided for increased enrollment over the three-year period. Condensed Summary of Revenues, Expenses, and Changes in Net Assets June Operating revenues: Tuition and fees, net $ 234,075, ,112, ,746,236 Grants and contracts 82,257,616 81,761,644 79,882,791 Fee-for-service state contract 10,906,347 22,860,290 3,541,151 Sales and services of educational activities 1,356,510 1,449,894 1,038,173 Auxiliary enterprises, net 41,387,150 41,552,120 38,895,405 Other 8,338,016 9,762,896 9,426,697 Total operating revenues 378,320, ,498, ,530,453 Operating expenses: Instruction 219,979, ,714, ,366,078 Research 170, ,504 88,551 Public service 3,431,668 4,179,695 4,404,203 Academic support 36,292,217 34,650,384 34,413,831 Student services 55,683,205 51,192,466 47,881,565 Institutional support 73,628,507 71,443,337 67,601,384 Operation and maintenance of plant 53,320,159 45,625,398 47,069,253 Scholarships and fellowships 22,457,365 25,457,019 19,799,690 Auxiliary enterprises 44,220,245 43,514,915 40,280,060 Depreciation 23,914,545 21,420,555 20,259,450 Total operating expenses 533,097, ,530, ,164,065 Operating loss (154,776,550) (130,031,817) (169,633,612) Nonoperating revenues (expenses): State appropriations 45,964,065 49,339,382 38,476,832 State Fiscal Stabilization Funding 4,523,158 71,186,390 Federal Pell grants 145,210, ,545, ,143,611 Amendment 50 funding 6,035,507 5,360,539 Distributions to Local District Colleges and Area Vocational Schools (19,574,820) (22,418,236) (11,662,619) 24 (Continued)

29 Management s Discussion and Analysis (Unaudited) Condensed Summary of Revenues, Expenses, and Changes in Net Assets June Other nonoperating revenues and expenses, net $ 4,282,143 8,975,509 8,960,781 Net nonoperating revenues 181,916, ,325, ,104,995 Income before other revenues, expenses, gains, or losses 27,140,447 60,293,981 45,471,383 State capital contributions 7,679,114 23,086,772 21,466,589 Capital grants and gifts 1,470,212 2,064,248 3,853,666 Increase in net assets 36,289,773 85,445,001 70,791,638 Net assets: Beginning of year 586,996, ,551, ,759,508 End of year $ 623,285, ,996, ,551,146 The charts below give a summary of the total CCCS revenues and expenses with no delineation between operating and nonoperating revenue and expense streams: Sources of Revenue Fiscal Year 2012 Others 3.9% Student Financial Aid 30.8% Fee-for-Service State Contract 1.9% Tuition and Fees 41.0% Capital Contributions and Grants/Gifts 1.6% Auxiliary Enterprises 7.2% State Appropriations 4.6% Grants and Contracts 9.0% 25 (Continued)

30 Management s Discussion and Analysis (Unaudited) Sources of Revenue Fiscal Year 2011 Student Financial Aid 28.7% Fee-for-Service State Contract 3.8% Tuition and Fees 37.7% Others 4.5% Capital Contributions and Grants/Gifts 4.2% State Fiscal Stabilization Funding 0.8% State Appropriations Auxiliary Enterprises 4.5% 6.9% Grants and Contracts 8.9% Sources of Revenue Fiscal Year 2010 Student Financial Aid 24.2% Others 3.8% Capital Contributions and Grants/Gifts 4.5% State Fiscal Stabilization Funding 12.8% Auxiliary Enterprises 7.0% Fee-for-Service State Contract 0.6% Tuition and Fees 32.8% State Appropriations 4.8% Grants and Contracts 9.5% As the above charts demonstrate, student tuition and fees are the largest revenue source for CCCS in fiscal years 2012, 2011, and The operating loss of approximately $154.8 million, $130.0 million, and $169.6 million in fiscal years 2012, 2011, and 2010, respectively, noted above, is a result of operating expenses exceeding operating revenues. CCCS supplemented operating revenues with State appropriations and Federal Pell grants for 26 (Continued)

31 Management s Discussion and Analysis (Unaudited) fiscal years 2012, 2011, and 2010; SFSF for fiscal years 2011 and 2010, and Amendment 50 funding for fiscal year 2012 and 2011, which are classified as nonoperating revenues but are used to fund operations. Revenue activity highlights for fiscal year 2012 include: Tuition and fee revenue increased, net of the effect of scholarship allowances, by approximately $7.0 million or 3.1%. This increase was primarily due to the fact that there was a $14.2 million increase in gross tuition and fee revenue due to an 1.0% decrease in enrollment offset by an increase of 10% in resident tuition and 5.0% in nonresident tuition rates with an even greater increase in scholarship allowance of $7.2 million directly as a result of increased Federal Pell grant awards for students with an offset of a $2.6 million decrease in the COF stipend. FFS state contracts decreased by $12.0 million or 52.3% due to a decrease in FFS appropriations from the State. Other operating revenue decreased by $1.4 million or 14.6% as a result of the elimination of internal service revenues of $0.5 million not recognized in prior year, and the reevaluation of revenue classifications for direct loan activity, Perkins loans payments, and private donations resulting in a further reduction of $1.5 million. State appropriations decreased by $3.4 million or 6.8% due to a decrease in appropriations for LDCs and AVSs of $2.8 million. SFSF decreased by $4.5 million or 100.0%. In fiscal year 2012, this funding was discontinued. State capital contributions decreased $15.4 million or 66.7%. This decrease is primarily due to completion of projects funded through the State s certificates of participation at CNCC on its Academic Building Project, Front Range Community College on the new laboratory wing of its science building on the Larimer campus, and Morgan Community College on its space and building improvements for the health and science programs. Revenue activity highlights for fiscal year 2011 include: Tuition and fee revenue increased, net of the effect of scholarship allowances, by approximately $44.4 million or 24.3%. This increase was primarily due to the fact that there was a $42.4 million increase in tuition revenue due to an 10.3% increase in enrollment coupled with an increase of 9.0% in resident tuition and 5.0% in nonresident tuition rates with an even greater increase in scholarship allowance of $33.6 million directly as a result of increased Federal Pell grant awards for students and a $35.5 million increase in the COF stipend. FFS state contracts increased by $19.3 million or 545.6% due to an increase in FFS appropriations from the State. State appropriations increased by $10.9 million or 28.1% due to an increase in appropriations for LDCs and AVSs of $10.8 million. SFSF decreased by $66.7 million or 93.6%. In fiscal year 2011, this funding was partially offset by the increase in FFS of $18.9 million and increase in COF of $35.5 million. 27 (Continued)

32 Management s Discussion and Analysis (Unaudited) Federal Pell grants increased $36.4 million or 33.7% due to an increase in overall enrollment of 10.3% leading to a greater number of students qualifying as well as an increase in the award per student under new legislation. Amendment 50 funding in the amount of $5.4 million was received for the first time in fiscal year These funds were limited in use to classroom instruction-related activities and scholarships for students. State capital contributions increased $1.6 million or 7.5%. This increase is primarily due to continuing projects funded through the State s certificates of participation at CNCC on its Academic Building Project, Front Range Community College on the new laboratory wing of its science building on the Larimer campus, and Morgan Community College on its space and building improvements for the health and science programs. Capital grants and gifts decreased a total of $1.8 million or 46.4% due to CNCC s Foundation contribution for the Stiegel building and NJC s private donation for the purchase of a golf course and clubhouse facility in fiscal year Operation and Maintenance of Plant 10.0% Auxiliary Enterprises 8.3% Scholarships and Fellowships 4.2% Operating Expenses Fiscal Year 2012 Depreciation 4.5% Instruction 41.4% Institutional Support 13.8% Student Services 10.4% Research 0.0% Public Service 0.6% Academic Support 6.8% 28 (Continued)